Innovation And Corporate Dynamics: A Theoretical Framework

The authors provide a detailed analysis of a Generalized Proportional Growth Model (GPGM) of innovation and corporate dynamics that encompasses the Gibrat's Law of Proportionate Effect and the Simon growth process as particular instances. The predictions of the model are derived in terms of firm size distribution, the distribution of firm growth rates, and the relationships between firm size and the mean and variance of firm growth rates. They test the model against data from the worldwide pharmaceutical industry and find its predictions to be in good agreement with empirical evidence on all four dimensions.